How are transfer prices and taxes related?

Transfer prices determine the operating profit of subunits (They sort of gain a revenue based of the product they sell, and costs related to this). If subunits are based in different tax jurisdictions, transfer prices can be designed to minimize total tax payments (benefiting the whole organization): • If selling division is in a lower tax-rate area: Higher transfer price is optimal. • If buying division is in a lower tax-rate area: Lower transfer price is optimal. However, tax laws are in place to constrain firms’ attempts to shift profits to low tax-rate areas by guidelines for the proper design of tax-related transfer prices.